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Q1 2003 investor conference call - George Cope presentation

Great thanks, Darren, and good morning everyone. We turn from slide 10 over to slide 11.

Before I begin the presentation, just to remind investors that our strategy laid out when TELUS Mobility, Clearnet and Quebec Tele-Mobility came together in the year 2000 was to focus on profitability, rather than trying to be the leader in that adds; that strategy's continued and, I think, is evolving successfully. Our objective is to be a leader in revenue and EBITDA growth and clearly if we lead in subscriber growth that's a bonus, but that is not a focus of our organization.

I would say we've added one objective here at TELUS Mobility beyond revenue and EBITDA growth and that is also being one of the leaders in free cash flow growth in the wireless industry in Canada.

Turning now to slide 12, just to set the context for investors in terms of our industry in Canada today, we are expecting this year that the industry will surpass the 40% penetration mark. We believe it'll represent about 3% to 3-1/2% penetration gain. We have however, in that number, revised down, therefore our net adds for the industry, we believe the industry will be closer to a million net adds this year, versus our initial view that it would be closer to 1.2 million.

And as a result, Bob will comment in a few minutes, we have also reduced our own guidance consistent with the industry overall reduction we expect and experienced in the first quarter. We expect our market share will maintain where we expected it would be at 1.2 million adds but our 350,000 new guidance reflects a lower overall expected penetration growth this year than we had initially planned.

Turning to slide 13 you can see that our net adds position, in terms of market share, continue to be strong, although our net adds were down year over year consistent with the industry, our share of net adds at 33% is approximately where we were last year in the first quarter. In fact, maybe slightly up, but hard to know yet as one of the competitors has not yet reported, and I understand will report later today.

Turning to slide 14, obviously very significant for investors, was the increase in our ARPU from $52 to $54 for the first quarter of this year. One of the major contributors to that was the move last year to one minute billing from one second billing and also a continual increase in data revenue for our organization. Another interesting milestone for us that revenue growth actually outstripped subscriber growth at 19% revenue growth versus 15% net add growth. And also our post-paid and pre-paid ARPU's both went up; so this isn't a reflection of mix, in fact, both went up.

And I was looking this morning trying to remember, I believe it's the first time in the 18 years I've been in the industry, that we've seen quarter over quarter increases in ARPU and if you go to slide 15, it's been a positive for the industry as each of our major competitors also reported an increase in ARPU, and I guess obviously very significant for TELUS Mobility, even as they increase their ARPU, our ability to increase ours meant that we maintained our premium leadership of approximately 20% over our competitors.

We've also seen an increase in our minutes of use, up to 315 a month versus 250 minutes last year. That bodes well we think for the fact that people are using their phones more and more in their daily lives and probably bodes well for ARPU for the industry going forward. And with that, we can see increases throughout the remainder of the year is very hard to call but certainly seeing the decline come to a halt is very important in terms of the profitability of our industry as a whole.

Turning to slide 16, I'd like to announce this morning that TELUS Mobility will be following our two major competitors in changing our evening and weekend clock. We currently sell an evening and weekend package that starts at 6:00 in the evening, as of June 1, those packages will start at 8:00 in the evening. We will grandfather all of our current clients, just as we did with the move to per minute billing. We will also, though, enable clients who want to purchase the old clock, they will be able to do that for a price of $5; that is consistent with what one of our other competitors has done. That way, if there is some demand for that timeframe, we will be getting paid for it, either through the clock changing or through people paying the $5.

The impacts we believe will be positive for ARPU again, similar to what we saw last year as we moved to one second billing -- one minute billing. Should have a positive impact on industry churn as all the major competitors, I understand, will be grandfathering current clients, hence the incentive to move will be less. Now what hasn't been mentioned is this change will also help capital in the industry because the 6:00 to 8:00 time period is a very busy time period and taking away the free availability over time will help in terms of capital. So another significant move for the wireless industry in terms of stabilizing any decline in ARPU.

Turning to slide 17, there've been a lot of positives this quarter, I think the one that's most valuable for investors would be the reduction in our churn rate. Our churn is now, as we reported, at 1.5%, down from 1.9% last year. We have taken the expected life of our client base from 52 months, a year ago, to 66 months today. These improvements have come from a lot of effort at the organization, I mentioned already the move to per minute billing, we've had a dramatic improvement in our client service levels as we've consolidated the organization under one billing platform.

Our networks across Canada, in some cases, are enjoying dropped call rates under 1%, and according to one of our suppliers, the lowest dropped call rates they've seen anywhere in North America. Our network coverage in Eastern Canada was dramatically improved through the roaming agreement. We've made a significant investment in retention, we generally, are spending $2 to $2.50 per month per subscriber in retaining our clients and we will continue to do that going forward. And we are the only carrier in Canada that offers 3-year contracts as opposed to just 2 year contracts, and such our cost to retain clients will only come up every 3 years versus every 2 for our competitors and we think that will help drive our retention costs, over time, lower that that of our competitors. Obviously we'd love to see them move to 3 year contracts, that helps deal with subsidies in the industry in a more profitable way and hopefully we'll see something like that in the future from them.

Turning to slide 18, I think there's two messages from this chart, one is TELUS' clearly positioned to sell as one of the world leaders in churns; certainly North American leaders in churn. And also the Canadian wireless industry in total, the churn rates are dramatically lower than that in the US and that should bode well for the industry going forward and obviously for investors looking at, not just TELUS Mobility, but the Canadian wireless industry. I will mention that that is a blended churn rate for TELUS Mobility, includes both our post-paid and our pre-paid clients.

Turning now to slide 19, you can see here the true benefits of our increase in ARPU and our decrease in churn as the lifetime value of our subscribers has gone from $2800 last year to $3500. And although we've had a slight increase in our cost of acquisition, in fact our cost of acquisition you take that over the expected life of our clients, has in fact, gone down. And I would argue a 12% over lifetime revenue is one of the lowest of any carrier in North America today, if not the lowest. Now clearly we spend a little more on COA on the Mike network than some of our competitors would given that functionality that we get, but at 12%, we fundamentally believe we have one of the lowest costs of acquisition over the expected life of our client in the industry.

Turning to slide 20, this is really the outcome of all the metrics I've chatted about. We had an excellent growth in EBITDA of 46%, in fact, many investors may remember the last year's $123 million EBITDA number included a $22 million one time tax win on PST. So if you actually look at that our EBITDA growth was 76%. I think that's really not the relevant point, the relevant point is how are we controlling our costs as revenues grow. And, in fact, if you look, you will see that our revenue growth of about $78-$79 million in network revenues is almost identical to our EBITDA growth if normalized. We had approximately 100% flow through of revenue. Our headcount has been roughly flat year over year and we continue to see great efficiencies in the organization.

Our margin expansion to 36% now puts us in best in class in North America. Our EBITDA margin is now higher than AT&T Wireless, Cingular, T-Mobile and Sprint, and we're nipping at the heels of both Nextel and Verizon and they obviously have much more scale advantage over TELUS Mobility. As a result of that, Bob will comment in a moment, we've upped our guidance for TELUS Mobility this year and I believe that at the end of this quarter we were second only to Nextel in terms of EBITDA growth and will work on the seeing if it's possible to surpass them.

Turning to slide 21, we generated significant cash flow as Darren had indicated, capex was $54 million in the quarter, down 44% from $97 million last year. You can see the significant expansion here is an increase in our cash flow five-fold. And I will tell you that our internal goal is to make sure that our CFO is happy with the cash flow we generate and we're certainly going to target to try to generate anywhere from $250 million to $300 million of cash flow for TELUS this year at TELUS Mobility. If we can hold the capital tight and grow the EBITDA, we think it's indeed a possibility.

In summary on slide 22, we captured a solid, solid share of the net add growth, obviously very pleased with the 19% revenue growth in terms of being industry leading. We continue to see financial discipline and focus on profitability amongst all of our competitors, our major competitors as we've seen another price change in the industry that's the second in two years with the movement of the EW clock. Churn is clearly a great benefactor to the organization in our flow through and we've had excellent EBITDA growth. And we believe we are providing a return that's consistent with our objectives set out a number of years ago when we pulled together TELUS Mobility, Clearnet and Quebec-tel. Thank you and I'll turn it over to Bob McFarlane.

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Q1 2003 investor conference call - presentations

John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
George Cope, president and chief executive officer, TELUS Mobility
Robert McFarlane, executive vice-president and chief financial officer
Question period